Building affordable homes

India’s real estate sector needs large funding, transformative infrastructure development, and supportive regulatory and policy mechanisms to achieve social and economic objectives
For Indians, the most important form of social security is to own a house. It is a proxy for their social standing and prestige. But housing is expensive: realty in New Delhi and Mumbai is generally priced out of reach and remains mostly unsold. In India, there is a housing shortage, along with rising inventory and mostly bankrupt developers. Land, especially with basic infrastructure in place, remains a limited commodity.

Feroze Varun Gandhi

There is now significant social stress on the economy with rising urbanisation and an expanding middle class, along with a housing shortage estimated at 62.5 million units. Over 65 million people live in slums. The demand for houses is expected to increase to 88.8 million affordable units, according to the Pronab Sen Committee on Slum Statistics, within the next two to four years, with the deficit in urban areas touching 18.9 million units. An estimated investment of $1.7 trillion is required to meet the housing shortage.

Amidst(in the middle of,के बीच) this demand graph, the housing and construction sector remains India’s second largest employment generator. Real estate comprises 20-30 per cent of this, contributing to 5 per cent of India’s GDP. Despite this demand, investment remains in a downturn. Affordable housing remains a myth. Why is land available and yet so unaffordable?

The absence of land

Unfavourable land management policies such as the Urban Land (Ceiling and Regulation Act), 1976, remain prevalent in certain States, along with low Floor Space Index (FSI) ceilings in different cities. As a result, small low-rise residences and commercial complexes are being developed on each plot, leading to lower incomes for developers and, hence, higher prices to cover land costs.

The issue of titling(right,अधिकार) and the lack of property rights information add to the problem. Under Indian law, registration of sale of land is compulsory, but the registration authority is not required to verify from the seller either the history or ownership of the land. This weakens buyer protection and acts more as a fiscal instrument for the state instead of being a statutory support of certainty to title. Urban India recognises presumed ownership to land, a questionable claim which can be challenged.

Floor Area Ratio/FSI ratios have led to horizontal expansion and need to be doubled to bring about a vertical expansion. Andhra Pradesh, in particular, has removed the FAR concept, creating adequate supply and stabilised prices. A land pooling policy would aid in semi-urban areas, with beneficiaries being exempted from tax on capital gains and stamp duties.

If there is successful implementation of the National Land Records Management Programme (NLRMP) by 2018, it will make it easier for developers to focus on suitable land parcels with reduced litigation(judicial processing,मुकदमेबाजी) risks.

Regulatory complexity

Project launches and completion delays are becoming commonplace, alongwith bottlenecks in the supply of raw materials and labour. Regulatory approvals remain a complex process, with a minimum of 34 of them to be followed by a developer to obtain construction permits. This takes 18-36 months.

Most departments issuing such permits have similar checklists. This leads to duplication of work and delays. Both the National Housing Policy 2007 and the Jawaharlal Nehru National Urban Renewal Mission have identified “simplification of the building approval process” as an important area for action. The government needs to expedite(speed up the progress,शीघ्र निपटाना) the implementation of the IT-enabled “single window approval system” with linkages between the Centre and State governments, urban bodies and panchayat levels (SAPREP Committee, 2013). Urban experiments in Ahmedabad, Chennai and Pune have resulted in automated building plan approval processes.

Globally, many countries offer streamlined online processes and incentives to facilitate affordable housing — these can include tax deductions, density bonuses, direct subsidies, land grants, land use changes, and so on. The use of fee waivers and fast-track methods are tools adopted by some countries such as Malaysia to set administrative requirements. Hong Kong’s ‘smart regulator’ programme merged eight procedures involving six different agencies and two private utilities into a one stop centre. Affordable housing can be boosted by establishing a green channel for approving low-cost housing projects. The National Building Code of 2005 needs to be revisited for low-cost housing norms, and automatic clearances for projects with  Leadership in Energy and Environmental Design/Green Rating for Integrated Habitat Assessment certification should be ensured.

Gathering initial funding for any real estate project is a daunting(scare off,भयभीत करने वाला) task, especially for new entrants, as the Reserve Bank has set a 15 per cent threshold(entrance,प्रवेश) for banking exposure to real estate (including housing loans and construction finance). The absence of long-term funding from financial institutions has led developers to consider alternative financing with higher interest rates, leading to higher housing inflation.

Granting infrastructure status to real estate, especially to affordable housing, will open up additional financing avenues — insurance firms, tax-free infrastructure bonds or up to 50 per cent funding through external commercial borrowing. A public-private partnership mode with government backing, as Rajasthan has done, will also secure institutional lending at lower costs. Out of the Rs.22,407 crore budgeted for the housing sector, a separate allocation is required for affordable housing.

Rationalisation of tax, constituting 30-37 per cent of deal value, will incentivise housing development. This can be ushered(guide,दिखाना) in by reviewing its various constituents including stamp duty, service tax, value added tax, land conversion charges and external development charges. Unification of stamp duty and other charges across all States along with exemption on excise duty for pre-fabricated housing components is a medium-term measure. Introducing the Benami Transactions (Prohibition) Bill, 2015 and the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 (popularly known as the black money bill) will curb(control,नियंत्रण) the flow of black money into real estate, improving the overall affordability of the sector.

Keeping it affordable

High inflation rates affect the buying ability of first-time buyers, given higher interest payments. The government needs to focus on closing the affordability gap for economically weaker sections and low income groups’ housing segments through increased credit lines to micro housing finance companies, an expansion of formal banking services and subsidies on interest component for affordability gap loan. Revisiting the Rent Control Act could free up a significant portion of the 20 million unoccupied housing units.

Hong Kong and Singapore have institutionalised highly successful public housing programmes catering to 50 per cent and 85 per cent of their population respectively. Social housing, built through public-private partnership projects, could be developed to provide subsidised rental housing. Making rental income tax-free could potentially unlock 11 million housing units.

India’s real estate sector needs large funding, transformative infrastructure development, along with supportive regulatory and policy mechanisms to achieve social and economic objectives. Careful nurturing through policy action could catalyse India’s affordable housing boo